It’s that time of year again, when people across America try to guess the fate of 64 teams, most of which they have never heard of. I’m talking, of course, about March Madness, the NCAA’s Men’s basketball tournament.
When it comes to finances, it can be tempting to think of picking stocks in the same way we pick brackets. Do a little research, look at the expert projections, or just throw caution to the wind and go with the biggest name. This is probably the wrong approach.
Guesses are just that
Fun fact: with 63 matchups, and a 50/50 chance of picking right, people filling out brackets have about a 1 in 9.2 quintillion chance of guessing the outcome of each game correctly. What are the odds of picking the right stock? That’s not as easy to pin down. Moreover, you are also challenged with picking the right stocks for the right amount of time.
It is certainly possible to hone your strategy to get ahead. But our biases cause us to confuse luck for skill. If we have a good run, we attribute it to skill. If we lose money, we chalk it up to bad luck. There is too much at stake to let our biases guide us.
Bigger isn’t always better
Lehigh, Florida Gulf Coast and Mercer don’t have the most storied basketball programs in the NCAA, but they have one thing in common. They’ve all beaten Duke in the NCAA tournament. In fact, for all its success, if you chose Duke to win the championship each of the last 25 years, you would be wrong 88% of the time.
When many of us think of companies that trade in the New York Stock Exchange, we think of names like Amazon, Alphabet Inc., IBM and Apple. Because they are the “big names” in the news, we gravitate to them. But that doesn’t mean they are a sure thing for your investment portfolio. Remember, it’s not enough to have stocks that are worth a lot. They have to be worth more than you paid for them.
The experts are fallible
Nobody has ever picked every winner correctly in the NCAA tournament. Very few experts even guess the overall champion correctly. Is it because they don’t know what they are doing? Nope. It’s the uncertainty involved with choosing teams. Stocks are no different.
While looking to commentators experts can be a good thing, it’s best to understand their picks won’t work for everyone.
Get a complete financial picture
So what do we do? Work with an advisor to create a plan and stick to it. Your advisor will understand your goals, and make sure you don’t have all your eggs in one basket. As for your bracket, well, just have fun.
This article was originally published in the March 2020 issue of Living on the Lawn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
